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Dr Neil Lee

Cameron’s StartUp Loans are unlikely to create jobs or growth

Authors: Dr Neil Lee Neil Lee

28 May 2012

David Cameron has today announced StartUp Loans, a £2,500 loan to help young people start their own business. Schemes like this aim to address economic problems (the double dip recession) and social ones (high youth unemployment) simultaneously. And they are hard to oppose - everyone wants young people to be entrepreneurial wealth-creators.

Yet there are some good reasons to be sceptical about such schemes. Where they are done well – such as those run by the Prince’s Trust – they can be extremely valuable. But this isn’t always the case.

First of all, most new firms fail, even in benign economic conditions. Expecting young people to set up successful firms which grow in the face of a double dip recession is quite a challenge. Successful entrepreneurship requires either a rare talent or skills which most entrepreneurs only develop through time. The scheme will offer mentoring to ensure this happens, but it isn’t clear how successful this will be.

Second, start-ups don’t always create jobs. Instead, policymakers need to focus on the small minority of existing innovative firms who have the potential to drive growth. Our research for NESTA suggests that these firms face a number of distinct barriers to growth – such as management skills and financing – addressing these barriers may be a more effective way of stimulating growth than creating new firms.

But finally, this scheme just looks cheap. The balance of evidence suggests financing is a particular issue for young people. But £2,500 is very little money to start up a new firm. It might help young people start firms in sectors with low barriers to entry, such as painting and decorating, or help people into lifestyle businesses with little growth orientation.

Yet it is unlikely to create the innovative firms on which the recovery depends. Efforts to run schemes like this on the cheap may be counterproductive – entrepreneurship is difficult anyway, and it is important not to put off a generation of budding entrepreneurs through inadequate help.

The long-term impact on participants is where the real success, or failure, of the scheme will lie. If participants develop an entrepreneurial mentality and the skills to run their own businesses the scheme will have succeeded, even if many of the firms created do not. But this relies on participants being offered high quality training and mentoring and enough finance to set up firms which have a genuine chance of success. Yet this cannot be done on the cheap. Business support is best when focused on good support for fewer firms. There may be too many StartUp Loans, not too few.

 

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